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What you don’t know can hurt you

In 30+ years of litigating insurance claims against insurance companies, the most common refrain I hear from clients after they suffer a loss or are sued is: “I cannot believe I am not covered for that!” Or, “my broker assured me I was covered.” Or, “if I am not covered, what have I been paying for all these years?”

Of course, once you suffer a loss or are sued, it is too late to reform your insurance policy to cover the risk. Thus, the failure to understand the scope of your coverage in relation to the risks that most concern you can be a very costly oversight. And, not surprisingly, when faced with hundreds of pages of dense insurance policy language that may be inscrutable and seem contradictory, many business people really do not have a handle on the coverage they have purchased. Often, they put their trust in their insurers and brokers only to later learn, when a claim arises, that those folks did not understand the risks that were of greatest concern.

The disconnect between what is covered and what you want to be covered for is not likely the result of any nefarious misdeed by anyone, but rather is more likely the result of poor communication. This stems from a poor explanation of or imprecise thinking around why you want coverage on one hand and the confusing paradigm by which insurance policies are written on the other hand. Clarifying why you want coverage can be resolved. However, the other side of the communication glitch may be harder to conquer.

Insurance policies are written in a way that seems to cover all risks. They are sold as “All Risk,” or “Comprehensive Coverage General Liability” policies, or “Umbrella Coverage” policies. In reality, the comprehensive coverage excludes many risks, with additional exceptions to the exclusions all blanketed by a healthy dose of cross referenced definitions that contain their own exceptions and exclusions. Against this quagmire of words, understanding what is covered or excluded before the loss is incurred becomes an exercise in imagining an unfathomable range of possible losses and risk that is as wide and deep as one’s imagination. To make matters worse, insurers modify their contracts from year to year to adjust language, usually to reduce the scope of coverage. Further, the policy that applies to your loss may not be the current policy in your portfolio, but may be a policy purchased years ago with a “long tail” or one that you acquired by virtue of merger or acquisition. And, different states’ laws may apply to the interpretation of different policies depending on the facts around how and where the policies were purchased, where the loss is incurred and where any dispute over coverage is litigated.

Against this backdrop, how can one ever understand whether they are covered by their insurance? The first step is to review your coverage with specific reference to the risks that most concern you.

No one can predict or provide against any and all risks that may occur. Despite “umbrella” or “all risk” or “comprehensive” coverage offered by the insurance industry, no policy covers all risks. Far from it. But, by identifying the risks that most concern you, insurance policies can be read with specific risks in mind and the holes or gaps in coverage can be identified. Once those gaps are identified, coverage may be clarified or perhaps purchased to fill the gaps.

If the gaps cannot be filled, other risk mitigation measures may be employed by you to protect against loss – such as changes in internal protocols, modifying business plans or self-insuring against loss.

A natural reaction I have heard when raising these issues with clients is – “I thought that my broker was taking care of all this!” Sometimes this is true. However, the quality of brokers varies widely and they have one thing in common. Primarily they are in the business of selling coverage, not handling claims. While some may try to help you once a claim is made, by then it is too late. The coverage is either there or it is not. Again, it is imperative to understand your risk before you suffer the loss.

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